A 1031 exchange calculator could motivate you to take the leap. These complex transactions involve selling one property and wrapping up the potential taxes into the second property.
While it’s easier to simply sell one property and buy another one, a 1031 exchange can help you to save a lot of money. How much? Let’s find out.
Understand Capital Gain
The IRS explains that investment property is a capital asset. When you sell it, you’re required to pay taxes on the amount realized from the sale.
If you’ve purchased property as an investment, the taxes you’ll pay on capital gain eat into your potential profits. In some cases, they can wipe your profits away altogether.
A 1031 exchange allows you to take those potential taxes and bundle them into a new property. The tax liability doesn’t go away, but you’re also not required to pay it right now. If you eventually sell the property through another exchange, you can keep moving that tax burden forward. If you die, your heirs aren’t required to pay it.
Items You’ll Need for a 1031 Exchange Calculator
A 1031 exchange calculator is really a capital gains assessment tool. Using something like this can help you understand how much you’d pay in taxes through a traditional sale and purchase process.
These are the things you’ll need to effectively use a 1031 exchange calculator:
1. The Basis
Your basis is the original cost of the asset you’re selling, including the purchase price you paid and any closing costs or fees you were responsible for at that time.
2. Capital Improvement Costs
Capital improvements are significant investments or changes you made to the property during the time you owned it. That could include things like renovations, upgrades, or additions.
3. Depreciation
Depreciation is a value that reflects the wear and tear the property experienced over the time you owned it. Depreciation reduces the value of the property overall. Typically, your tax records include this value. If not, you may need an accountant to help you determine how much depreciation you can claim.
4. The Sales Price
The sales price is the amount you received when you sold the asset. It should include closing costs and fees you were responsible for at the time of the sale.
5. Sales Expenses
Your sales expenses include any fees you encountered in selling the property, such as commissions, advertising fees, and assessments.
6. Loan Balance
If you used a loan to purchase the property, you may have a balance left behind when you sold it. This remaining liability could reduce your capital gains liability.
Your 1031 Exchange Calculator: Step by Step
Once you’ve gathered all of the information we’ve outlined, it’s time to crunch the numbers. These are the steps involved:
Step 1: Calculate Your Adjusted Basis
To find this number, use the following mathematical model:
Basis + Improvement – Depreciation
Step 2: Calculate Your Net Sales Proceeds
To find this number, use the following mathematical model:
Sales Price – Sales Expenses – Loan Balance
Step 3: Determine Your Capital Gain
To find this number, use the following mathematical model:
Net Sales Proceeds – Adjusted Basis
Step 4: Find Your Tax Rate
The IRS has complicated rules about capital gains, and it can take time to determine how much will be on your bill.
Your capital gains might fall within one of the following thresholds:
0%: If your taxable income is $44,625 and you’re single filing separately, or it’s $89,250 and you’re married filing jointly, or it’s $59,750 and you’re the head of household, your capital gains are zero.
15%: If your taxable income is $44,625 to $492,300 and single, $44,625 to $276,900 and married filing separately, $89,250 to $553,850 for married filing jointly, or $59,750 to $523,050 for head of household, your tax rate is 15%.
25%: If the sale involved section 1250 real property, it’s taxed at a 25% rate.
Per current laws, corporations face the same tax rates as individuals. It’s not uncommon for large organizations with deep pockets to pay the most in taxes.
Step 5: See Your Savings
You’re almost done! Just one last step is involved to determine how much you could potentially save with a 1031 exchange. Use this mathematical model:
Capital Gain x Tax Rate
Why Should You Calculate Your Capital Gains?
Your tax liabilities don’t disappear when you use a 1031 exchange. Instead, they’re rolled into the new property. Understanding your deferred tax liability is important.
However, using a calculator could help to motivate you to participate in this kind of process. Once you know how much you can save, you might never go back. It’s common for people to continue using 1031 exchanges to defer tax liability as they sell and buy property.
Get Help With Your 1031 Exchange
It’s clear that a 1031 exchange can save you money. However, these transactions are complicated. You can’t do this alone. At 1031 Pros, we’ve handled thousands of transactions like this for investors both large and small.
With our security measures, your financial interests will be protected, and you’ll avoid immediate capital gains. We simplify the process for you, ensuring it’s done correctly and as seamlessly as possible. Contact us to get started.
References
Topic No. 409: Capital Gains and Losses. (January 2024). Internal Revenue Service.
Like-Kind Exchanges Under IRC Section 1031. (February 2008). Internal Revenue Service.
Corporate: Income Determination. (February 2024). PwC.
Like-Kind Exchanges - Real Estate Tax Tips. (November 2023). Internal Revenue Service.
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